In a system where tens of thousands of words are made up of a limited number of phonemes, many words are bound to sound alike. This similarity of the words in the lexicon as characterized by phonological neighbourhood density (PhND) has been shown to affect speed and accuracy of word comprehension and production. Whereas there is a consensus about the interfering nature of neighbourhood effects in comprehension, the language production literature offers a more contradictory picture with mainly facilitatory but also interfering effects reported on word production. Here we report both of these two types of effects in the same study. Multiple regression mixed models analyses were conducted on PhND effects on errors produced in a naming task by a group of 21 participants with aphasia. These participants produced more formal errors (interfering effect) for words in dense phonological neighbourhoods, but produced fewer nonwords and semantic errors (a facilitatory effect) with increasing density. In order to investigate the nature of these opposite effects of PhND, we further analysed a subset of formal errors and nonword errors by distinguishing errors differing on a single phoneme from the target (corresponding to the definition of phonological neighbours) from those differing on two or more phonemes. This analysis confirmed that only formal errors that were phonological neighbours of the target increased in dense neighbourhoods, while all other errors decreased. Based on additional observations favouring a lexical origin of these formal errors (they exceeded the probability of producing a real-word error by chance, were of a higher frequency, and preserved the grammatical category of the targets), we suggest that the interfering effect of PhND is due to competition between lexical neighbours and target words in dense neighbourhoods.